JNJ Diabetes Data Benefit Lilly, Hurt Merck

We attended the American Diabetes Association Meeting and the presentation of the CANVAS Outcomes data for
Johnson & Johnson’s
Invokana.

We also had the opportunity to host an investor dinner with members of the
Eli Lilly
(ticker: LLY) diabetes team. Note that we are currently Restricted on Johnson & Johnson (JNJ), as Credit Suisse is acting as an advisor to Actelion in Johnson & Johnson’s pending acquisition of the company.

However, we see important implications from the CANVAS results to Lilly and
Merck
(MRK) within our coverage. Specifically, we see Lilly’s Jardiance benefiting the most from CANVAS, while Merck’s Januvia may face incremental pressure.

Validated cardiovascular benefits should boost the sodium-glucose co-transporter 2 (SGLT-2) class. On CANVAS’ primary composite MACE outcome (including cardiovascular death, nonfatal heart attack and nonfatal stroke) there was a 14% reduction seen in patients who were treated with Invokana as compared to placebo. Ironically, this is exactly the same reduction that was seen by Lilly’s Jardiance in its EMPA-REG Outcomes trial. In fact, despite the studies enrolling somewhat different populations, the results for the two trials were roughly comparable on key efficacy endpoints. Importantly, however, Jardiance showed a benefit on cardiovascular death and all-cause mortality, while Invokana did not. CANVAS also validated the benefit seen in reducing cardiovascular death or hospitalizations for heart failure as well as on certain endpoints related to kidney disease, which bodes well for the ongoing studies Lilly has with Jardiance in those specific populations.

The recent Food and Drug Administration Drug Safety Communication highlighting a risk of increased amputations with Invokana has changed the dynamics of the SGLT-2 class. Our conversations with experts at the American Diabetes Association (ADA) suggest many feel this may in fact be a class effect, potentially related to volume depletion in patients who have a history of peripheral artery disease or prior amputation. The ongoing DECLARE study for
AstraZeneca’s
(AZN) Farxiga will provide additional insights into this issue since amputations are being captured systematically in that trial. While the overall cardiovascular and kidney benefits from CANVAS seem to outweigh the amputation risk, the differences in the product labels on this topic will likely lead to a significant commercial advantage that Lilly should be able to leverage going forward.

In addition to the boost Lilly is expecting to Jardiance from CANVAS, they see continued strong growth ahead for Trulicity given the growth we are seeing with the glucagon-like peptide 1 (GLP-1) class and the ease of injection that Trulicity offers. An important upcoming catalyst for Trulicity will be the SUSTAIN-7 data from
Novo Nordisk
(NVO) comparing once-weekly semaglutide to Trulicity. Based on our review of the data for both products, we feel it is likely semaglutide will show superiority on weight loss and probably on A1C reduction. The key may turn out to be whether or not there is any retinopathy seen with semaglutide in SUSTAIN-7, as has been seen previously. Lilly feels retinopathy will likely end up in the semaglutide label regardless and, given the sensitivity patients and physicians have to that issue, our conversations with experts lead us to believe that would significantly limit semaglutide’s potential, while allowing Trulicity to continue to show strong growth. On the pricing front, with discussions around 2018 formularies ongoing, there were limited insights shared during our dinner, although overall Lilly remains very confident in their position given the broad diabetes portfolio that they can offer to payers.

Merck’s Januvia remains the dominant market leader in the dipeptidyl peptidase-4 (DPP-4) space. With the majority of DPP-4 prescriptions written by primary care physicians, it will likely take some more time to see the commercial impact from CANVAS. Over time, however, we expect the enthusiastic response to the CANVAS efficacy data driving use of the SGLT-2 class earlier in the course of treatment, while concurrently pushing the DPP-4s further back. Merck (along with
Pfizer
(PFE)) have filed their own SGLT-2 inhibitor ertugliflozin with the FDA with potential approval this December. The product is well behind Jardiance and Invokana, however, and will not have outcomes data for another couple years. In addition, given Pfizer will take a portion of the ertugliflozin economics, any sales that shift from Januvia to ertugliflozin would be a net negative for Merck.

-- Vamil Divan -- Barbara Kotei -- Duaa Mohamed

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